Educational Articles

Dow-30 Earnings: Pfizer – Second Quarter 2013

Michael Ratty
| July 30, 2013

Pfizer (PFE – Free Pfizer Stock Report), the world's largest drugmaker and a Dow-30 component, has reported second-quarter GAAP earnings of $1.98 a share, versus $0.42 in the comparable period of 2012. Adjusted earnings, which exclude one-time gains (in this case), charges, and other nonrecurring items, came in at $0.56 a share, versus $0.59 in 2012. The significant difference between the GAAP and adjusted figures primarily reflects Pfizer's completed spinoff of its animal health business (Zoetis) on June 24th. The transaction resulted in a pretax gain of approximately $10.5 billion. Excluding this one-time gain, quarterly profits were slightly ahead of consensus estimates, as stronger sales in other core franchises and effective cost management helped to offset the continued deterioration of off-patent cholesterol medication LIPITOR. The earnings release followed Monday's noteworthy announcement that the company will be reorganizing its commercial operations into three separate divisions, two for branded products and one for generics. All told, management updated its full-year earnings guidance from $1.44-$1.59 a share, to $3.07-$3.22, reflecting the gain associated with Zoetis. Adjusted guidance remained at $2.10-$2.20 a share. Shares of Pfizer edged up modestly in early morning trading on the news.

In the June period, total revenues declined 14% year over year, to $13.0 billion (calculations are against the originally reported figures), continuing a downward trend that dates back to the fourth quarter of 2011. It is no coincidence that Pfizer lost patent protection on its former blockbuster, LIPITOR, in November of that year, as this has been the key driver of top-line deceleration over this time. With generics continuing to flood the market, LIPITOR sales plummeted an additional 55% in the second quarter, to $545 million, and now represent a paltry 4% of total revenues. While the impact clearly has been significant, Pfizer has started to gain some traction in recent quarters, thanks to positive momentum in other core franchises including LYRICA and CELEBREX. Sales of LYRICA, which is currently the company's top-grossing product, rose 10% in the second quarter, to $1.1 billion, while CELEBREX sales increased 8%, to $715 million. Pfizer's growing oncology segment also offered a nice boost, with revenues increasing 24%, to $400 million.

Amid declining revenues, Pfizer has been working to sell off non-core businesses in order to focus primarily on what it sees to be its bread and butter operations, creating innovative new drugs and vaccines for humans. This has been highlighted over the past few years by the sale of its Nutrition business to Nestle in 2012 and its more recent spinoff of Zoetis in June. To take it a step further, on July 29th Pfizer announced the reorganization of its commercial operations into three divisions, one of which will focus on products losing patent protection, another will handle drugs with years of exclusivity remaining, and the third will be comprised of vaccines, cancer treatments, and consumer products. The changes will be implemented beginning in the first quarter of 2014, at which time the company will provide greater transparency for each business segment, including baseline profit forecasts.

In our view, near-term operating conditions will likely remain challenging for Pfizer as it continues to navigate the post-LIPITOR era. Though we are confident the pipeline will be sufficient in restoring top-line growth down the road, it may take some time for recent and upcoming launches to be developed into meaningful contributors. That said, our overall investment thesis remains largely unchanged since our July 12th full-page report. Pfizer is a relatively safe bet in the pharmaceuticals space due to its solid financials and fundamentals, sizable share in most markets, and impressive track record. For investors seeking an attractive and well-defined total return play with relative stability, high-quality Pfizer stock has an above-average dividend yield and a top rank for Safety (1). The company's Financial Strength (A++) is also our premier rating.

About The Company:Pfizer is a major producer of pharmaceuticals, hospital products, consumer products, and animal health lines. Important product names include Norvasc (cardiovascular); Zoloft (antidepressant); Zithromax (antibiotic); Lipitor (cholesterol); Aricept (Alzheimer’s); Cardura (cardiovascular); Diflucan (antifungal); Zyrtec (antihistamine); Viagra (impotence); and Celebrex (rheumatoid arthritis and osteoarthritis). International sales accounted for about 61% of total sales in 2012.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.